LANXESS INDIA P.LTD,THANE vs. DCIT CIR 1, THANE

The present appeal is directed against Final Assessment Order dated, 10.12.2014, passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as ‗the Act‘] as per directions issued by Dispute Resolution Panel-III, Mumbai (hereinafter referred to as ‗the DRP‘) under Section 144C(5) of the Act pertaining to the Assessment Year 2010-11.

The Appellant has raised additional ground which read as under:

The Appellant had benchmarked the said segment by selecting External Transactional Net Margin Method (TNMM') as the most appropriate method (MAM). However, TPO rejected the same. The TPO called for plant-wise segmental information for export of goods to AEs and Non-AEs. The TPO applied internal TNMM as the most appropriate method for benchmarking the international transaction for export of goods from Thane Plant. Whereas, the TPO applied the CUP method for benchmarking international transaction of export of goods from Nagda Plant. Thus, the TPO vide order dated 20.01.2014 passed under Section 92CA(3) of the Act, proposed upward transfer pricing adjustment of INR 1,05,43,246/- consisting of transfer pricing adjustment of INR 54,62,391 and INR 50,80,855/- in respect of goods exported from Thane Plant and Nagda Plant, respectively. The Assessing Officer proposed the aforesaid transfer pricing addition in the Draft Assessment Order, dated 24.03.2014. Further, the 3 Assessment Year: 2010-11 Assessing Officer also proposed (a) addition of INR 48,69,49,361/- being purchases in excess of the purchases confirmed by the three vendors in response to 133(6) notices sent by the Assessing Officer, and (b) addition of INR 3,85,29,119/- being excess credit balances confirmed by the five Sundry Creditors in excess of the balances recorded by the Appellant in his books of accounts.

The Appellant filed objections before the DRP against the Draft Assessment Order, dated 24.03.2014 which were rejected and therefore, Final Assessment Order, dated 10.12.2014 was passed by the Assessing Officer making transfer pricing addition of INR 1,05,43,246, and disallowance of INR 9,77,21,726/- consisting of INR 4,86,49,361/- pertaining to unexplained expenditure and INR 3,85,29,119/- undisclosed income.

Being aggrieved the Appellant is now in appeal before us against the Final Assessment Order, dated 10.12.2014 on the ground reproduced in paragraph 2 above which are taken up in seriatim hereinunder.

We have considered the rival submissions and perused the material on record. The only grievance raised by the Appellant before DRP was that while applying internal TNMM for benchmarking the international transactions of export of goods from Thane Plant, the TPO had compared OP/OC from total sales to non-AEs (i.e. domestic sales as well as export sales) which stood at 11.90% with the OP/OC of export sales from Thane Plant which stood at 3.56%. It was contended on behalf of the Appellant that the segment of export to AEs should have been compared with the segment of export to non- AEs since the data was available and the margins were not disputed. Under TNMM broad similarity in FAR is acceptable since the net margins, which are tested, are more tolerant to the differences. Contention of the Appellant before Assessing Officer and DRP was that exports made to different geographical location to non-AEs could be considered to benchmark export sales to AEs by adopting internal TNMM method since the transactions undertaken with the AEs and Non-AEs were in the same industry, and had high level of similarity with respect to products, cost of goods sold, manufacturing processes, etc. In our view, the DRP erred in adopting the aforesaid reasoning given by the Appellant to include even the domestic sales made by the Appellant for benchmarking the export sales made to AEs from Thane Plant. Accordingly, we set aside the transfer pricing addition of INR 54,62,391/- and direct the 6 Assessment Year: 2010-11 TPO/Assessing Officer to re-compute ALP of the international transaction of export of goods from Thane Plant by taking OP/OC of the export sales to non-AEs. In view of the aforesaid directions, Ground No. 1 raised by the Appellant allowed.

Ld. Authorised Representative for the Appellant submitted that the TPO has erred in applying two different methods for benchmarking transactions of exports from Nagda Plant. The TPO has himself accepted application of Internal TNMM for transactions of 65% of exports from Nagda Plant. For the balance 35% of the export of goods from Nadga Plant, the TPO has made transfer pricing adjustment using CUP method, which is inherently incorrect. Further, the Ld. Authorised Representative for the Appellant submitted that CUP method cannot be considered as the most appropriate method for benchmarking exports of goods from Nagda Plant as the said method requires a very high degree of comparability with regard to quality of products or services, contractual terms, geographic markets and level of markets. Various instances of such differences were pointed out to the TPO. For example, major exports have been made by the Appellant to the AE in USA (INR.5,25,42,740/-). There was a huge volume difference in exports to AE in USA vis-a-vis other exports to Non-AEs which are far lesser in volumes. Such huge volume differences were bound to impact the sale prices of the products in open market. Thus, it was submitted on behalf of the Appellant that owing to such a huge volume and geographical difference, CUP could not be adopted as Assessment Year: 2010-11 most appropriate method for benchmarking export sales of goods from Nagda Plant since it was not possible to eliminate the differences which exist on account of volume and geography for the purpose of benchmarking. He further submitted that it was settled position that under CUP method, price of a transaction is tested which is very sensitive to differences in volume, market, timing, contractual terms, etc. and unless such strict comparability is satisfied, the CUP method cannot be considered as the most appropriate method. In this regard reliance was placed on the decision of the Hon'ble Bombay High Court in case of PCIT vs. Amphenol Interconnect India P. Ltd (ITA No. 1131/2015 & Others) and on the decision of the Tribunal in case of Firmenich Aromatics Production (India) Pvt. Ltd vs. ITO (ITA No. 7145/Mum/2017), and Intervet India Pvt. Ltd Vs. DCIT (70 Taxmann.com 163 Pune-Trib).

We have considered the rival submissions and perused the material on record. We note that in identical facts and circumstances, the Mumbai Bench of the Tribunal has, in the case of Firmenich Assessment Year: 2010-11 Aromatics Production (India) Pvt. Ltd vs. ITO [ITA No. 7145/Mum/2017, Assessment Year 2013-14, pronounced on 13.11.2018], held that CUP Method could not be adopted as most the appropriate method holding as under: ―9. According to us, the price at which finished products were sold to AEs are not comparable with prices at which they have been sold to Non-AEs for the below mentioned reasons:— (i). Differences in volume of both the transactions - It is general knowledge that volumes commands the prices. Purchase or sale of lower quantities are expensive, this is usually because of cost of transportation for deliveries and administration cost involved in handling smaller deliveries. The assessee is engaged in manufacturing of aromatic ingredients, natural and synthetic perfumery, flavoring and derivatives. Specific and majority of the products manufactured are sold to the group companies. However, in the circumstances where the group entities do not want a product then it is sold in the market at a price best negotiated by the assessee. In the table below, the assessee has provided the details of the quantitative differences in respect of Sales made to the AE and the Non-AE. Sr. No in Material Quantity Quantity Addition AE sales TPO Description in KG in KG Value (INR) times of Order sold to sold to Non AE Non AE's AE's sales 59 Neobutenone 25 32,343 490,680,563 1,294 Alpha 56 Damascenone 25 19,734 490,873,437 789 Total 45 Great Heart 28,080 303,840 95,340,394 11 55 Aldehyde 245 38,528 96,920,377 157 Supra 57 Damascone 2,175 33,610 84,185,258 15 Alpha 60 Norlimbanol 250 10,825 73,314,292 43 1,331,314,321 Thus, we find from the facts of the case that the quantities sold to Non-AEs is significantly lower as compared with sales made to AEs. In fact the difference in quantities is to the extent of 1,294 times to 11 9 Assessment Year: 2010-11 times. It is noteworthy that the CUP analysis of common products sold to AE and Non-AE, one of the example taken from the facts of the case is that w.r.t. product 'Damascenone Total', the assessee had sold 25 kg to a Non-AE at the rate of INR 38,000 per kg and sold 1,260 kg and 16,299 kg at the rate of INR 9,800 and INR 9,664 respectively to its AE namely, Firmenich Aromatics (China) Company Limited and Firmenich SA. Similarly, the assesee has sold 50 kg of the same product at the rate of INR 36,408 to other AE. Thus, TPO erred in comparing small; quantities with large quantities, thereby ignoring the volume difference. We also noted that when the quantity sold to a Non-AE is higher than that sold to an AE, then the price charged from the AE is more than non-AE. The assessee also explained that this would show that the comparison done by the TPO is wholly erroneous.

We find that this issue is covered by the decision of the Coordinate Bench of this ITAT in the case of M/s. Amphenol Interconnect India Pvt. Ltd., in [TS-201- ITAT2014(PUN)-TP], wherein it is held as under: xx xx 13. Further, Hon‘ble Bombay High Court dismissed the appeal of the Department filed by the Department against the ITAT‘s order and noted that in this case, since the finished goods are customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences, the CUP method would not be the most appropriate method to determine the ALP. It upheld the stand of the assessee that TNMM is the most appropriate method to arrive at ALP. This judgement is reported as PCIT Vs. M/s. Amphenol Interconnect India Pvt. Ltd., (supra).

In view of the above facts of the case and the issue being covered by the decision of the Co-ordinate Bench of the Tribunal in the case of PCIT Vs. M/s. Amphenol Interconnect India Pvt. Ltd., (supra) and which is affirmed by the Hon‘ble Bombay High Court, respectfully following the same we delete the addition and allow this issue of assessee‘s appeal.‖ (Emphasis Supplied) 16. On perusal of above, it can be gathered that in similar facts and circumstances the Tribunal has held CUP Method cannot be adopted as most appropriate method owing to differences on account of volume, geography, functions performed, and risks assumed while transacting with AEs and non-AEs in case such difference cannot be eliminated or adjusted. Adopting the reasoning given by the Tribunal in the aforesaid decision we hold that CUP Method could not have been adopted as the most appropriate method as the difference on 11 Assessment Year: 2010-11 account of volume and geography could not be eliminated or adjusted in the present case.

Further, in the case of Amphenol Interconnect India Pvt. Ltd Vs. Assistant Commission of Income Tax, Circle 8, Pune: [2019] 105 taxmann.com 382 (Pune - Trib.)[02-05-2019] it was held by the Pune Bench of the Tribunal that once TPO has accepted TNMM for majority of export to AEs, then there was no reason as to why for balance of export of finished goods, TNMM could not be applied by the TPO. The relevant extract of the decision reads as under:

We find that similar issue has arisen in the case of assessee starting from assessment year 2005-06. The Tribunal vide order 12 Assessment Year: 2010-11 dated Amphenol Interconnect India (P.) Ltd. v. Dy. CIT [2015] 64 taxmann.com 424 (Pune - Trib), relating to assessment year 2009- 10 on similar issue had referred to the order of Tribunal in earlier years relating to assessment years 2006-07 to 2008-09 decided vide consolidated order dated 30.05.2014 and had extensively deliberated upon the issue whether CUP method is to be applied for benchmarking international transactions of assessee and/or whether the assessee was correct in aggregating the transactions under the head 'Manufacturing Segment' and by applying TNMM method on aggregation basis compared the margins with other comparables picked up by the assessee.

Similar principle was also applied by the Tribunal in assessment year 2005-06 in Amphenol Interconnect India (P.) Ltd. v. Addl. CIT [2015] 58 taxmann.com 168/154 ITD 318 (Pune - Trib). The Tribunal while deciding the appeal of assessee in assessment year 2008-09 has referred to the findings of Tribunal in earlier year in paras 13 and 14 at pages 8 to 17 and had held that since the issue was identical to the issue decided in earlier years and following the same parity of reasoning, the Assessing Officer was directed to delete the said adjustment made in the hands of assessee.

Further, the Tribunal in assessee's own case in relating to assessment year 2010-11, vide order dated 12.05.2017 dismissed the appeal of Revenue on similar issue, copy of which is placed at pages 6 to 10 of Paper Book. The learned Authorized Representative for the assessee has also pointed out that the Hon'ble Bombay High Court vide order Pr. CIT v. Amphenol Interconnect India (P.) Ltd. [2018] 91 taxmann.com 441/[2019] 410 ITR 373, relating to assessment years 2006-07 to 2008-09 had also dismissed appeal of Revenue and upheld the order of Tribunal on both the issues. The issues which were raised before the Hon'ble High Court were as under:— "(i) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in considering TNMM and MAM, without considering the FAR analysis of the transactions to determine the ALP of the export sales to AEs.? (ii) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in differentiating CUP analysis on the basis of geographic difference and volume difference in respect of sale commission, especially when the commission is earned on the basis of percentage of sales?"

The Hon'ble High Court after analyzing the issues at length has held that CUP method would not be the most appropriate method in view of various adjustments, which would have to be made due 13 Assessment Year: 2010-11 to differences in FAR, in order to arrive at the arm's length price of finished goods. The Hon'ble High Court notes that the Tribunal had taken into account the fact that for overwhelming majority of exports to associated enterprises, the TPO has accepted the TNMM method for arriving at the arm's length price and hence, there was no reason why for balance of export of finished goods, TNMM method should not be applied. Similar direction was also given in respect of imports of finished goods, which were sold to third parties and the associated enterprises and by applying FAR analysis, it was held that where the finished goods were customized goods and the geographical differences, volume differences, timing differences, risk differences and functional differences were there, then CUP method would not be the most appropriate method to determine arm's length price. The TNMM method was held to be most appropriate method. Further, the Hon'ble High Court has applied similar reasoning while deciding appeal of assessee relating to assessment year 2005-06 in vide judgment dated 18.04.2018 and the appeal of Revenue has been dismissed. In the totality of the above said facts and circumstances, where the issue stands covered by the order of jurisdictional High Court in the case of assessee itself, there is no merit in the orders of authorities below in making aforesaid transfer pricing adjustment in the hands of assessee both with respect to exports to associated enterprises and with respect to imports from associated enterprises. It may be pointed out that majority of transactions have been accepted to be at arm's length price by the TPO by applying TNMM method, only in respect of few transactions, the TPO had applied CUP method. There is no merit in the order of TPO in this regard and reversing the final order passed by Assessing Officer, we allow the claim of assessee and direct the Assessing Officer to delete the transfer pricing adjustment made in the hands of assessee. The grounds of appeal

Ground No. 3 to 5 pertain to addition of INR 4,86,49,361/- and INR 3,85,29,119/- held by the Assessing Officer to be unexplained expenditure and undisclosed income, respectively.

At the outset the Ld. Authorised Representative sought for remand of the issues raised in Ground No. 3 to 5, to the Assessing Officer in view of the Additional Evidence placed before us vide letter dated 30.06.2017. He submitted that the Appellant was not able to produce the evidence before the Assessing Officer or DRP as the same was not available with the Appellant. Due to paucity of time the Appellant could not gather this evidence in time to place it before the Assessing Officer or DRP. Explaining this he submitted that during the assessment proceedings the Appellant was asked to submit details of the unsecured loans, and sundry creditors. In order to verify the transactions/balances the Assessing Officer issued notices to various parties in respect of which replies were received from some of the parties. Vide notice, dated 07.03.2014, (received by the Appellant on 10.03.2014), the Assessing Officer had provided to the Appellant a list of 25 parties which included (a) parties which had not replied to the notices issued by the Assessing Officer seeking balance confirmations and (b) parties which had replied to the notices but there existed differences between the amounts reported by the Appellant and as confirmed by these parties. The Appellant was effectively granted only 4 days time to collate the details and provide reconciliation as the Appellant was directed to file reply by 14.03.2014. The Ld. Authorised Representative for the Appellant submitted that in such short time span, the Appellant was not able to provide necessary documents and reconciliation in respect of 7/8 parties. The Appellant had, vide letter dated Assessment Year: 2010-11 19.03.2014, written to the Assessing Officer sought for a copy of confirmations received from various parties so that the Appellant could provide reconciliation. However, the aforesaid request was rejected by the Assessing Officer. Subsequently, on receipt of the assessment order passed, the Appellant commenced the exercise of reconciliation for the balance 7 parties for whom the disallowance was made in the aforesaid assessment order. Since, the Appellant‘s request to provide copy of confirmations received from parties was rejected by the Assessing Officer, the Appellant reached out to various vendors for a copy of the said confirmations. However, the Appellant could not complete the process and furnish the reconciliation statements before the DRP due to voluminous transactions spreading over multiple years and due to paucity of time. The Appellant has now been able to compile self-explanatory detailed reconciliation statements alongwith ledger accounts for 7 parties. The Appellant prays that the additional evidence be admitted. Reliance in this regard was placed in the decision in the case of CIT v. Kum. Satya Setia [1983] 143 ITR 486 (MP).

In response Ld. Departmental Representative submitted that the Appellant had been granted sufficient time to file documents/details before Assessing Officer and the DRP and therefore, the additional evidence should not be admitted.

We have considered the rival submission and perused the material on record. It is admitted position that the Appellant was able to provide details for 18 parties out of the 25 parties listed in notice dated 10.03.2014 (served on the Appellant on 19.03.2014). The Appellant has now placed on record additional evidence pertaining to 7 parties. We have perused the additional evidence placed on record and consider the same to be relevant for Ground No. 3 to 5 Assessment Year: 2010-11 raised by the Appellant. The Appellant was not able to produce evidence before lower authorities due to paucity of time and partly for the reason that the information/evidence was also not in the knowledge/possession of the Appellant at the relevant time. Accepting the reasons failure to furnish this evidence before the Assessing Officer and DRP provided by the Appellant, we admit the additional evidence in terms of Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 and remand issue raised in Ground No. 3 to 5 to the file of Assessing Officer for adjudication afresh after taking into consideration the additional evidence placed on record by the Appellant vide letter dated 30.06.2017 [Paper-Book II Pg 205-279]. With the aforesaid directions, Ground Nos. 3 to 5 stands disposed off.